The Value of Healthcare Setting the Stage: Looking to the Future Ian Morrison.

The Value of HealthcareSetting the Stage: Looking to the Future

Ian Morrison

Outline

The Economic Value of Health and Healthcare Values, Perceptions and Attitudes The Case of Pharmaceuticals Scenarios for the Next Decade The Value of Healthcare: Toward an Action

Agenda

The Emerging Value Context

Rising costs Rising cost shifting to consumers The Fat Trapper, Bariatric Surgery and the “Swaning of America” Infatuation with Technology based care Evidence that Innovation makes a difference Expect more Innovation in long term although gaps in the short run Potential Paradigm Emerging

– High cost, High efficacy, High Customization but unaffordable – The Concorde Syndrome

The Quest for Value – IOM: Balancing cost, quality, access and equity– Evidence based medicine and evidence based benefit design– Pay for Performance– Value Purchasing

Attitudes toward Value

Strong argument that American healthcare is a poor value– The International Story– The Dartmouth Story

Americans love high technology medicine and think we as a society should spend more on it…..but, OPM (Other People’s Money)

Healthcare is a superior good, as we grow economically we will spend more, but it has to flow from……– Government– Employers– Households

Value is in the eye of the beholder …..and the payer Value is being redefined as we move to engage the consumer as payer

and decision-maker What is value to the millions left behind?

Value and the Transformation of the National Debate

It’s not just about cost containment It’s not just about affordability It’s not just about prices It’s not just about life expectancy It’s not just about societal level value It’s not just about the best, no matter how much

it costs It’s not just about healthcare as the last industry

to go offshore to China or India

Innovation Imperatives

Consumers love new technology Innovation is the pharmaceutical industry’s ace in price

control debates But if you don’t truly innovate in a way consumers

appreciate and pay for……. The new environment shifts responsibility for payment

increasingly and transparency of pricing to consumers for all aspects of healthcare not just drugs

Delivering innovation to an end user consumer that has value they are willing to pay their own money for

Do not overestimate (even) Americans willingness to trade up

Are we comfortable with overt tiering?

Percentage of consumers who say each industry does a good job serving their customers

1997

% 1998

% 1999

% 2000

% 2001

% 2002

% 2003

% Change

since ‘97 Change

since ‘02 Hospitals 77 73 71 72 67 73 73 -4 -

Banks 75 72 68 73 71 74 72 -3 -2

Computer hardware companies 80* 78 80 76 78 59 71 -9 +12

Computer software companies 80* 77 80 78 80 60 70 -10 +10

Car manufacturers 70 69 70 67 67 64 64 -6 -

Airlines N/A 78 71 66 51 63 64 -14 +1

Telephone companies 80 76 67 64 61 58 57 -23 -1

Life insurance 64 63 61 62 60 55 56 -8 +1

Pharmaceutical and drug companies

79 73 66 59 57 59 49 -30 -10

Oil companies 59 64 55 39 27 38 42 -17 +4

Health insurance companies 55 48 41 39 38 51 40 -15 -11

Managed care companies 51 45 34 29 29 33 30 -21 -3

Tobacco companies 34 32 31 28 28 25 30 -4 +5

How Consumers Rate Industries

* In 1997 “computer companies” were rated together (I.e. hardware and software companies were not measured separately

** Because airlines were not included in 1997, the trend for airlines is from 1998 - 2002

Health Care Tops List of Industries Public Wants to See More Regulated

20%

8%

10%

11%

21%

24%

26%

30%

31%

35%

35%

44%

52%

57%

59%

60%

None of these

Computer hardware companies

Supermarkets

Computer Software Companies

Banks

Car manufacturers

Packaged Food Companies

Telephone Companies

Airlines

Life Insurance Companies

Tobacco Companies

Oil Companies

37%

27%

40%

22%

35%

14%

23%

12%

20%

34%

11%

3%

4%

13%

7%

4%

Should Be More Regulated Generally Honest & Trustworthy

Hospitals

Managed Care Companies

Health Insurance Companies

Pharmaceutical Companies

The Value of Health Care

14%

21%

24%

32%

35%

36%

43%

63%

Health insurance companies

Brand name prescription drugs

Hospitals

Pharmacies

Doctors

OTC (non-prescription) drugs

Medical devices

Generic prescription drugs

Percentage of consumers rating each of the following a very good or fairly good value

Source: Harris Interactive/Wall Street Journal. Aug 19, 2003

The Argument For Consumer Responsibility for Payment

Consumers have been progressively insulated from the cost of care for the last 40 years

If they only knew how much healthcare cost and had to pay they would use it less

If they were responsible for paying they would also take more responsibility to become healthy and cost the system less

Consumers should have the right to choose and to trade up to better quality with their own money

When they are make rational consumer choices the market will be working and whatever is spent will be appropriate like any other market or sector of the economy

The Argument Against Consumer Responsibility for Payment

The 5/50 Problem: Most consumers that are heavy users have significant co-morbidity or serious illness like cancer, they didn’t choose this health status

One day in an American hospital and they are over their maximum deductible, so……

Catastrophic coverage is a green light for excessive care by hospitals and procedure-oriented specialists

While skin in the game can clearly move people around does it save money overall?

The equity problems:– A de facto reallocation of resources from poor to rich (my access to the

collective social capital of health insurance is better because I can come up with the economic down payment for physician visits and tests)

– Poor people with chronic illnesses will be disproportionately affected by consumer responsibility for payment

Consumer Exposure to Health Care Costs is About to Increase

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1980 1988 1990 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030%

5%

10%

15%

20%

25%

30%

Percentage of total personal health care expenditures paid out-of-pocket

Source: Centers for Medicare and Medicaid Services Projected

Per capita amount of personal health care expenditures paid out-of-pocket

The Case of Pharmaceuticals

Coverage and Value Tiering and consumer strategies How do consumers behave? What are the challenges?

Who Pays for Drugs?

48.2%

42.7%

39.5%

34.9%33.4%

32.0%

32.1%

37.1%40.0%

44.0%45.3% 46.2%

17.3% 18.0% 18.8%20.1% 20.6% 20.8% 21.2% 21.3% 21.8%

36.8%

54.7%56.2%

52.7%

59.1%

42.4%

27.3%26.5%28.5%

24.4%

16.6%

19.8%

10%

20%

30%

40%

50%

60%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: Kaiser Family Foundation and Sonderegger Research Center analysis of CMS data

Percent of Total National Prescription Drug Expenditures by Type of Payer

Private insurance

Out-of-pocket

Government programs

The Five-Tier Formulary

Old Generic

New Generic

Rebated Brands

Non-Rebated Brands

Look Good / Feel Good

Lowest Copay

Highest Copay and/or

Coinsurance

James Brown and Fernando Lamas Effect

Mortality

Morbidity

Mobility

Feel Good

Look Good

Quality of Life

Affluence of the Individual or Society

End-Point

“Skin in the Game” Matters

Trading down twice as often as trading up Rapid increase in generic and therapeutic

substitution Poor, chronically ill most effected Starting to lead to adverse health outcomes like the

uninsured Simple cost shifting without sophisticated disease

management is not the right answer in the long-term

Big Increase in Trading Down on Drugs

17%

34%

51%

11%

20%

37%

Not fill aprescription

Asked doctorto prescribe

less expensivedrug

Asked doctoror pharmacistfor a generic

drug

2003 2002

Base: Total cost of prescription drugs increased last year (53%)

Rx co-pay increase: More bargain-hunting since 2002. Low- and middle-income

equally likely to “trade-down”

Percentage of consumers who did the following in response to an increase in prescription drugs cost sharing

2003 by Income

2002

% 2003

% <$35k $35-

75k $75k+

Ask doctor or pharmacist for generic 37 51 56 61 40

Ask doctor for less expensive alternative 20 34 44 39 23

Use mail order service to fill Rx 16 20 18 18 22

Not get a prescription filled 11 17 31 21 7

Take medication less often than you should N/A 13 32 12 5

Base: Copays for prescription drugs increased a lot or a little in past year

The Transformation of Pharmaceuticals

Discover a unique white powder

Search for a therapeutic action Establish safety and efficacy Make sure it’s better than

available alternatives Promote to the profession Get a passive payer to pay for

it

Design a white powder with a predictable therapeutic action

Establish safety, efficacy and cost-effectiveness

Make sure it meets a previously unmet medical need or has an effect that is detectable to human beings

Promote to all the Ps (patient, physician, PBM, payer, pharmacist, politician, press)

Get an active payer to pay for it

Past Future

% o

f P

atie

nts

Do nothing

Chronic pill popping

(Rolaids for Yuppies)

Me-too Fast Followers

& Generics

Higher PriceHigher Efficacy

InnovativeTechnology

Big Pharma Success

Heavy-duty traditional therapy

Evidence-based medicine

Consumer payment

Marketing

Demonstration of clinical efficacy

Traditional Pharmaceuticals vs. Advanced Therapeutics

Cost

Happy Biotechnologist Scenario

We have the best stuff Sure it’s expensive, but it works Because it works there are savings elsewhere This is complex – do not try this stuff at home As generic competition makes costs go down for

some technologies, there will be more gross margin left for us

Catastrophic drug coverage insulates consumers from caring about price

Biotechnologist’s Nightmare Scenario

Public, physicians, policymakers could care less about large molecules; we don’t buy drugs by the atom

It’s complex brewing not chemistry, but how hard could it be? Big ugly buyers and providers incensed about price of technology High efficacy focused on small sliver of needy, desperate patients Payers/purchasers

– Medicare inpatients – the stent effect– Medicare hospital outpatient – the value case– Administering Physicians e.g. oncologists

zero-sum game on incomes “Plop, plop” vs clinical efficacy

– Consumers Co-insurance on top tier All drugs in CDHP

Can you pass the NICE/Kaiser Test?

Demonstrating “Value”

What is value? Benefit / Cost? Quality/Cost? Access/Cost? Benefit to whom?

– Patient, physician, payer, insurer, employer, government, public(?), politician?

Cost to whom?– Patient, physician, payer, insurer, government, public

(taxpayer)? Is “value” (for money) the same as cost-effectiveness? Remember if you cut the price in half, you double the

value

Market Nirvana

Market Driven Government Driven

Minor Delivery System Reform

Major Delivery System Reform

Four Scenarios for Health Care2004-2010

Tiers R’Us

NationalRational

Healthcare

Bigger Government

Scenario 1: Tiers R’ Us

The SUVing of American Healthcare We pay more for choice and control WIPDBS brings the market to Medicare Chronically ill, low income beware Catastrophic coverage for the very sick The benefits of benefit design: save employers money Trading down more often than trading up A world of opportunity and risk Private sector celebrated

Scenario 2: Bigger Government

Major backlash against cost shifting to consumers 2008 election run on the retirement and health security issues of the middle

class Protect the baby-boom at all costs

– Medicare Advantage for All or– Pay or Play or– Expanded Medicare and FICA tax or– Fill the donut holes, stick it to pharma, shore up the entitlement

Live with the consequences– Politicization of healthcare spending– Rationing and restriction– Lower Innovation– Lower profits– Equity over efficiency– Rising costs and taxes

Scenario 3: Market Nirvana

Break the Culture of Entitlement Consumers learn to discriminate and pay We buy care not cars Incentives for health and personal responsibility Catastrophic coverage and retail medicine for all Utilization based on ability to pay The rise of cheapo plans and delivery systems Reaching high end retail customers is key Delivery reform is market-based not evidence-based Opportunities abound for the entrepreneurial America’s economic base as private sector healthcare High quality, high service, low equity

Scenario 4: National Rational Healthcare

Universality and Delivery System Redesign Evidence-based floors and ceilings Pay for Performance Reference-pricing and cost-effectiveness criteria for new technology Financial rewards for clinical redesign Universal Mandated Coverage

– Employer and individual mandates or– Expanded Medicare Advantage or– Expanded Safety Net Delivery Floor

Expanded Access and Rational Design Delivery System Innovation rewarded All enabled by a 21st century IT and bioscience infrastructure

Implications for Value

No matter what, we will need better value measures and more transparency of measures

Value based purchasing will become more prevalent and have a powerful influence on providers and vendors

Consumers will become more engaged in value decisions but we cannot rely on them absolutely

The systems of healthcare need to be continuously improved to deliver greater value

Towards an Action Agenda

The Need for Leadership Stakeholder Dialogue

– Not just IOM or NHI– Conversation for Action– Not about figure pointing– Constructive Engagement about Value Improvement in

Healthcare– Redesign of the systems of healthcare

Generate Enthusiasm Cultivate Broad Community Dialogue Identify Quick Victories